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Emerging markets flock to World Economic Forum

DAVOS Q&AThe balance of power among dealmakers is shifting, and this year's World Economic Forum is proof: A record number of executives from emerging markets will attend the Alpine conference, a networking goldmine for the global business elite.

About 365 corporate executives from Brazil, Russia, India, China and other emerging nations are slated to gather in Davos, Switzerland, this week.

Those countries helped lead the world out of a recession and will drive growth this year, according to the International Monetary Fund, which estimates emerging markets may expand 6.5 per cent in 2011, more than double the 2.5 per cent rate for developed nations.

"It's a reflection of where economic power and influence is starting to move," said William Vereker, Nomura Holdings co-head of global investment banking, who is based in London.

Takeovers involving so-called BRIC countries surged almost 80 per cent last year and accounted for a record 22 percent of the $2.23 trillion (Dh8.1tn) of global deals, according to data compiled by Bloomberg.

Acquirers from BRIC nations announced $402 bn of takeovers, up 74 per cent from 2009 and more than quadruple five years earlier, the data show.

Dealmaking between BRIC nations and western competitors will increase as countries such as China and India seek to secure natural resources to support their burgeoning economies, and while US and European stalwarts such as Cisco Systems, Procter & Gamble, General Electric and Vivendi SA seek to tap those markets for growth.

"We are going to see a big turning point," said Jeff Joerres, chief executive officer of Milwaukee-based Manpower, the world's second-biggest staffing firm, who is attending Davos as he weighs takeovers in India and China. "The emerging markets recovered faster out of the downturn and the western markets are relying on much of the emerging markets for their profits."

The race is earnest. Telefonica SA last year raised its bid for Vivo Participacoes SA three times to 7.5bn euros ($10.3bn) to gain control of Brazil's biggest wireless operator. PepsiCo in December agreed to buy a controlling stake in Russia's Wimm-Bill-Dann Dairy & Juice for $3.8bn. Including debt, PepsiCo is paying 19.8 times Wimm-Bill-Dann's earnings before interest, taxes and depreciation and amortisation in the past 12 months, double the median multiple for similar deals since 2001, according to Bloomberg data.

BRIC Targets:

Deals may get an additional boost as valuation gaps narrow between markets. China's Shanghai Composite Index trades at 17.3 times earnings, the cheapest relative to the Standard & Poor's 500 Index since November 2008, weekly data compiled by Bloomberg show. The Bombay Stock Exchange's Sensitive Index in India is valued at 17.2 times, the least expensive since June 2010 relative to the S&P 500. Brazil's Bovespa index trades at 13.9 times earnings and Russia's Micex index is valued at 9.5 times, lower than the S&P 500's ratio of 15.6, the data show.

The number of takeovers of BRIC targets jumped 66 percent last year from 2005, with more than 4,150 announced acquisitions, Bloomberg data show. The fourth quarter of 2010 was a record for deals involving BRIC nations with $156.8bn in takeovers.

Shifting Reality:

Conversations at Davos this year are likely to be defined by how companies cope with the changing economic realities, said Jose Sergio Gabrielli, CEO of Petroleo Brasileiro SA, Brazil's state-controlled oil producer and Latin America's biggest company with a $224bn market value. Reliance Industries Chairman Mukesh Ambani, OAO Lukoil CEO Vagit Alekperov, and China Mobile Chairman Wang Jianzhou are also among BRIC attendees.

"The most pressing topic will be the slowdown of the most developed countries versus the sustainable growth of the BRIC countries," Gabrielli said.

The combined gross domestic product of the seven biggest developing economies will surpass that of the Group of Seven, the world's largest industrialized markets, in 2032, according to a January 7 PricewaterhouseCoopers report. China will overtake the US as the world's largest economy that year, the report said.

Natural Resources:

Petrobras, based in Rio de Janeiro, raised about $70 bn last year in the world's largest share sale as it seeks to double output within a decade by tapping offshore fields. The company has been in talks to buy Eni SpA's stake in Portugal's Galp Energia SGPS SA, a partner in deepwater exploration. The stake is valued at about 4 bn euros.

"All of the energy and natural resource companies have the tools to move forward and to look at where and how to invest," said Arielle Malard, a Paris-based Rothschild partner who focuses on emerging markets and first attended Davos in 1992.

Companies in Brazil, Russia, India and China hold $240m of cash on their balance sheet on average, up from $143m at the end of 2007, the peak for M&A. That compared with $665m for Western nations last year, Bloomberg data show.

China accounted for the most M&A volume in BRIC nations last year at $200 billion, up 33 percent from 2009, the data show. India was the fastest growing, with $72bn of announced deals, more than triple a year earlier. Vedanta Resources Plc, the UK metals producer controlled by Indian billionaire Anil Agarwal, agreed to buy a majority stake in Cairn India for $9.6bn to gain access to the country's biggest onshore oil field.

Emerging markets will play a major role in M&A in the next five to seven years, estimates Yury Spektorov, a partner at Bain & Co. in Moscow and member of the firm's M&A practice. That's why conversations at Davos will be different this year.

"Before, the discussions focused on surviving the crisis and now people are thinking about how they are going to develop and grow," Spektorov said. - Bloomberg.

 

With assistance from Michael Tsang, Shin Pei and Christine Harper in New York.

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